Insider's tip: how rewards credit cards end up costing you more

By Will Chen. Last updated 22 June 2009. 13 comments
Photo: Inkynobaka

Steve from Brooklyn used to work for a credit card issuer and he sent Wise Bread a great tip about the hidden dangers of reward cards:

I used to work for a large credit card issuer. One thing we found is that when our users upgraded from a standard bank-issued card (e.g. no rewards or points) to a rewards card (e.g. miles, hotel points, etc.), these same users also started charging a lot more to "non-essential" items e.g. Starbuck's, bookstore, dining out, entertainment, etc.

We also found that the reverse worked if users left the reward card (where there is an annual fee) and back to a standard card with no rewards but no points.

What we generally found is that when a user has a rewards card they spend more money on non-essential items because in the back of their mind they justified it because they were getting some type of reward points. "I don't need this extra large Starbuck's but it gets me miles therefore I'll buy it."

Or "these new shoes are $200 and I don't need them but that's 200 frequent flier miles."

However, in 75% of cases, the user ended up spending more money on interest charges and fees than was the value of the rewards. Generally rewards are only worth about 1% of your total charges. So if you spend an extra $1000 a year then you get about $10 worth of rewards.

The moral to this long story is pretty simple. For personal use, ditch the rewards cards and stick to a standard no-fee bank card that gives you nothing in return. You'll end up spending less money on non-essential items and have more money in the bank.

Editor's note: Thanks Steve!

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

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Guest's picture

I think this may be true in some cases as far as people spending money on nonessential items, but I think if they are good rewards cards users they are simply switching purchases that might have been made in cash or with a different credit card to the rewards card to maximize cash back. Assuming they pay it off each month this is smart.

Guest's picture

This is incomplete research. Yes, people who switch to reward cards may pay for more items on the card to earn more rewards, but these payments are likely taking the place of otherwise cash/check/non-reward transactions. They are not necessarily *new* transactions.

The savviest reward card users are not spending more. They are spending the same, it's only the method of payment that has changed. Plus, they benefit from the rewards.

Not all credit card users are savvy and possibly many will fall into the trap of spending more overall thanks to the convenience of credit cards, but it certainly isn't true for everyone.

Lynn Truong's picture

i love reward credit cards and i charge everything on credit cards.  i also pay them off every month.  i'm getting a $1000 check from amex and i didn't pay them a dime in finance charges.  i don't think it's the whole "rewards" thing that is the issue for people who can't control their spending.  it's just having the plastic on hand to buy something they can't afford.  if they don't have the "rewards" part to justify it, they'll have another excuse to justify charging something they can't afford.  i think the moral of the story is, stay away from credit cards if you can't control your spending.  but if you can pay off your credit card bill each month, there's no reason not to get 1%-5% back on everything.

Guest's picture

I think Flexo had it dead on. Perhaps people were paying cash for Starbucks, dining out, and entertainment. However, once you do get a card that gives you something back, why wouldn't you switch all those transactions (which you are buying anyway) to use that card? When you get no reward, you might as well just use cash.

Guest's picture

"For personal use, ditch the rewards cards and stick to a standard no-fee bank card that gives you nothing in return."

Even if you're going to use a check card, why wouldn't you use one that offers rewards? The rewards aren't as good, but at least you're getting something.

Greg Go's picture
Greg Go

Steve's note that the credit card companies make more money (via finance charges) from rewards cards versus non-rewards cards is telling.  Sure, on a individual basis, if you're paying off the cards every month, the rewards card is a better deal.  Not everyone is perfectly on top of their finances, so I think it's important to be honest with yourself before applying for a rewards card.

Remember that a 1 percent cashback reward gets eaten up pretty quickly by just one month of finance charges.

Will Chen's picture

"I think if they are good rewards cards user..."

I think most people who read personal finance blogs are pretty rational and responsible credit card users (or at least they strive to be).

But like Greg pointed out, Steve is talking about the population in general, and in that context I think most of what he said is very plausible.


Guest's picture

I have always advocated that saving is 90% matter of self discipline and 10% the use of right tools.
Great post!

Guest's picture

They hurt everyone else, too, whether they use plastic or cash. To pay for those rewards, the banks have jacked up a fee called the Interchange Fee which was originally just supposed to pay for transaction costs between issuing and acquiring banks. They're very guarded about these fees, because they bring in the biggest chunk of their revenue. And so they won't let merchants offer cash discounts or even TELL customers about the fee -- so they have to spread the cost over all products, for everybody. So even if you've never owned a credit card, you've paid extra so the banks can offer those big rewards to other people.

It's ridiculous. It might even be anti-competitive, but we need to find out more, and Visa and MC have done their best to avoid revealing anything. I'm working with a merchant group trying to raise awareness of the issue, so give it a look:

Hope that's informative for y'all.

Guest's picture

Here's a great tip from Dave Ramsey on the way to use a debit card as a credit card:

Guest's picture

I have to disagree with the assumption that all rewards cards are bad. I have been a American Express charge card holder for a year now. I pay a small annual fee and have earned thousands of dollars in rewards from things I have to buy like car insurance, gas and groceries. I was even able to pay for a number of my Christmas presents this year using my memberhsip rewards points. The difference between a Charge and Credit card is that you HAVE to pay your charge card off each month But unlike a debit card it has better protections and helps build your credit. Read this article for more good info on rewards credit cards

Guest's picture
Debit Rewards

You can avoid using a credit card and get rewards - my debit card has rewards, with all sorts of things to choose from. I use the debit to pay bills/gas/groceries, so don't feel pressure to buy non-essentials just to earn points. I choose cash every time.

Guest's picture

This is strange because credit card issuers actually seem to encourage the exact opposite behavior. For example, the AmEx Blue Cash pays you up to 5% on everyday items like groceries, gas, and drugstore purchases. But you only get up to 1.25% on the non-essentials.

From my research on credit cards for NerdWallet, I've found almost no cards that reward users for these sorts of frivolous purchases, except perhaps for store cards (which are generally a bad idea to begin with).